Assessing the dynamics of fintech in Indonesia

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“Assessing the dynamics of fintech in Indonesia” AUTHORS

Nofie Iman


Nofie Iman (2018). Assessing the dynamics of fintech in Indonesia. Investment Management and Financial Innovations, 15(4), 296-303. doi:10.21511/imfi.15(4).2018.24



Saturday, 08 December 2018


Thursday, 16 August 2018


Wednesday, 28 November 2018


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"Investment Management and Financial Innovations"






LLC “Consulting Publishing Company “Business Perspectives”


LLC “Consulting Publishing Company “Business Perspectives”







© The author(s) 2018. This publication is an open access article.

Investment Management and Financial Innovations, Volume 15, Issue 4, 2018

Nofie Iman (Indonesia)


Assessing the dynamics of fintech in Indonesia Abstract

LLC “СPС “Business Perspectives” Hryhorii Skovoroda lane, 10, Sumy, 40022, Ukraine

Received on: 16th of August, 2018 Accepted on: 28th of November, 2018

© Nofie Iman, 2018

Nofie Iman, Ph.D., Faculty Member and Researcher, Department of Management, Faculty of Economics and Business, University Gadjah Mada, Indonesia.

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International license, which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.


Financial technology or commonly known as fintech is relatively a new thing in Indonesia. This article is attempting to capture the dynamics of such technology in Indonesia. This paper was aimed to help researchers and academics who are interested in studying the phenomenon of fintech more broadly. This study is descriptive and exploratory by nature. Data were gathered from secondary sources, as well as interviews with practitioners, policy makers, and users. Data were collected during the period from 2016 to 2018, which was divided into several different stages. The results of the study show that fintech is more than just a phenomenon, it cannot be compared to other start-ups, and has the potential to fundamentally change the business and economic landscape.


financial technology, financial services, innovation, adoption

JEL Classification

G23, L84, O31, O33

INTRODUCTION Fintech came up and emerged so fast in Indonesia since 2010s. It was often considered to be as a result of the massively developed information and communication technology infrastructures in the country during the last decade. At the same time, the government of the Republic of Indonesia launched the vision of “Indonesia Digital Economy 2020” and “National Movement of 1000 Digital Start-ups”. However, only around 36 percent of Indonesia’s adult population have conventional banking accounts (Global Findex, 2014). As many as 170 million Indonesian residents have used mobile phones. About 130 million of them use mobile phones to access the Internet, but 80 millions of them apparently do not have access to conventional banking and financial services (Euromonitor, 2017). This gap obviously encourages start-up entrepreneurs to take advantage of those untapped opportunities. Initially, the emerging fintech business was expected to be an initiative capable of harmonizing financial inclusion in Indonesia through expanding access, reducing costs and increasing efficiency. However, fintech have also been criticized by focusing only on big and major cities and targeting tech-savvy customers who are not really financially excluded. Some of those customers even have already established long-term relationship with conventional banking institutions. Thus, it is necessary to examine whether fintech are really setting up new and innovative business models or simply taking advantage of the gaps left by traditional players (Riemer et al., 2017). This article aims to map the dynamics of fintech currently operating in Indonesia. In addition, this article also investigates the current prac-

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tices of fintech, identifies and looks at factors that encourage or inhibit adoption, and presents relevant findings for academics, practitioners and policy makers related to fintech in Indonesia. For this reason, this article is divided into the following: the article begins the with introduction and background. The first section is the theoretical basis and conceptual framework, the second section briefly reviews the methodology used, the third section is the findings and analysis of this study, while the last section presents conclusions and limitations.


dustry, not only in banking and financial sectors (Riemer et al., 2017).

There are various concepts and diverse definitions regarding fintech. The Oxford Dictionary (2017) defines fintech as “computer programs and other technologies used to support or enable banking and financial services”. Financial technology companies are generally founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software”. FinTech Weekly (2017) describes fintech as “a business that aims at providing financial services by making use of software and modern technology”. Meanwhile, Hung and Luo (2016) define fintech as “the combination of both domains that will lead innovative financial services to shift away from an in-house approach to relying on external providers to deliver online and mobile solutions in a timely manner” (p. 2).

Global phenomenon of fintech also cannot be separated from technology-based innovations that plague the banking and financial services sector (Hung & Luo, 2016). These innovations have resulted in structural changes that have an impact on lowering costs, increasing efficiency, and more effective coordination. Thus, it is no wonder that fintech will be applied in many sectors and industries (Zavolokina et al., 2016), including, but not limited to, online marketplace, peer-to-peer lending, equity crowdfunding, financial and investment management, financial application (including artificial intelligence, big data, machine learning), and robo-advisor.

Here, I argue that a number of theorems can be used to explain the emergence of fintech, includFrom these various definitions, there are several ing agency costs, transaction costs, network eximportant keywords that have emerged repeated- ternalities, multi-sided platforms, and disruptive ly: technology, service providers, banking, finan- innovations. cial services, and disruptive. Implicitly, these keywords illustrate that fintech has the flexibility that Agency cost is a kind of internal cost that arises conventional banking and financial services pro- from, or must be paid to, the party who acts as viders do not have. This flexibility allows fintech to an agent (Jensen & Meckling, 1976). Agency costs offer a variety of services, ranging from payments, arise because the business at the beginning of was investments, financing, insurance, to supporting only owned and managed by the same individual. infrastructure (back office) (see Table 1). On the As the economy grows, personal business grows other hand, however, these disruptive changes will into a large business entity and involves various also incur many challenges to the sector and in- parties with diverse interests. The term ‘agency’ Table 1. Business process Type of interaction Customer-to-customer (C2C)

Business-to-customer (B2C)

Business-to-business (B2B)

Business process

Some examples


Digital wallet, peer-to-peer (P2P) payment


Peer-to-peer (P2P) lending, equity crowdfunding


Crowdfunding, micro loan, credit facilities


Risk management


Security, data management


Big data analytics, predictive modeling


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refers to the interaction between principals (superiors) with agents (subordinates)1. To ensure that the business entity is running properly, agency costs are absolutely necessary. The existence of technological innovation in general will reduce agency costs significantly, making agents more accountable and transparent to their principals. Transaction costs (or often referred to as coordination costs) are costs that arise when an entity conducts economic exchanges or participates in the market (Coase, 1937; Williamson, 1979, 1981). A number of transaction costs arise in the form of information seeking costs (search and information costs), bargaining costs, as well as the costs of monitoring and law enforcement (policing and enforcement costs). Similar to agency costs, transaction costs also tend to be reduced through technological innovation. For example, with the presence of information technology, the cost of finding the best suppliers, trading partners, and customers will be cheaper. Moreover, the cost of negotiating a contract agreed upon by both parties and the costs of ensuring the contract is adhered to will also be lower.

one of the concepts that can be used to explain the emergence and widespread of technology. A multisided platform is a business model that brings together two or more independent groups of users (Rochet & Tirole, 2003). This interaction is facilitated by the existence of a platform that manages such connectivity (Gawer & Cusumano, 2002). Multisided platforms are relevant because most of the existing technology utilizes platform technology that brings together the user base, on the one hand, and the customer base, on the other hand. For example, peer-to-peer (P2P) lending is a form of multi-sided platform that connects funds owners, on the one hand, and those who need funding, on the other hand. The platform owner then charges the percentages of fees for managing such interaction.

Finally, disruptive innovations can also explain the phenomenon of fintech from different point of view. Disruptive innovation can be defined as the process by which a product or service emerges by offering a simple application in the lower market (Christensen, 1997). Slowly, they aim to penetrate the market that is above its level until it is finally able to replace the incumbent who first controlled the market. Fintech Network externalities is the effect on the user of a that appears and operates currently are considered product or service from another person who uses to be commonly following this disruptive pattern. the same or compatible product or service (Katz They come with products and services that tend to & Shapiro, 1985; Liebowitz & Margolis, 1994). be perfunctory, but continuously improve and exNetwork externalities can be positive when more pand their scope. Generally, incumbent and market users of a product or service also increase useful- authorities tend to ignore the presence of these disness for its users. It can also be negative when its ruptors, because they are difficult to detect. These usefulness decreases as users of the product or disruptors are also working on a market, which is service increase. In the context of fintech, positive considered not very profitable. network externalities can arise from the presence of fintech and their user base. Positive influences Moving on in the following section, I will review were born as a result of trends that are considered the research method used. current (fashion or stylishness), as well as from complementary products and services (comple- 2. METHODOLOGY mentors). Among millennials and metropolises, for example, fintech is seen as something “cool”. It is not easy to get a comprehensive picture of finFintech application can also be seen as a ‘comple- tech practices in Indonesia. On the one hand, the ment’ to other existing applications, such as mo- available data and information are so scattered bile banking applications, on-demand online and not comprehensive. On the other hand, quantransportation, and so on. titative market data and information are very rare and difficult to access by the public. However, this Fintech also cannot be separated from the concept limitation has actually been anticipated before of network externality. A multi-sided platform is this research is conducted. Therefore, I choose 1

Agency relations are not always between superiors (managers) and subordinates (employees), but can also occur between shareholders or owners with managers or managers. Agency relations can also be more horizontal, for example, between companies and suppliers (suppliers) or vendors and distributors.


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and design a meticulous and practical methodology to build a conceptual explanation of fintech in Indonesia. As previously anticipated, the use of various data collection instruments is also unavoidable. In addition, to overcome the complexity of fintech mapping in Indonesia, building an appropriate research approach is a necessity.


The research that has been initiated since 2016 has managed to gather interesting findings in the field. From the literature study, there are some slightly different data, but both show the large amount of fintech transactions in Indonesia, at around US$ 15 billion in 2017. Of that number, most of them First, I consider qualitative and interpretive ap- are engaged in the payment sector, followed by inproaches to be the most relevant (Denzin & Lincoln, vestment and lending (see Table 2). 1994). This approach allows the researcher to foTable 2. Fintech transactions in Indonesia cus on processes, mechanisms, and events that Source: Indonesian Fintech Association (2017). are expected to generate insight. This approach also provides deeper data collection and reflection Type of fintech Percentage, % on findings obtained. Moreover, this approach Payment 32 17 also supports the use of an ‘insider’ perspective Investment Lending 15 (Bryman & Bell, 2007). Methodological literature 11 also supports a qualitative approach for research Point-of-Sales (PoS) Crowdfunding 9 that needs to be approached using a conceptual Others 16 framework, which is and will still be developed Total (US$ 15 billion) 100 (Creswell, 2003). What we also should not forget is that qualitative research must be in a unique and dynamic context. Researchers are required to be Although this figure cannot be underestimated, able to build explanations and give meaning to the the actual potential of the fintech transactions can findings. Philosophically, ‘truth’ is subjective, de- be even higher. Another data show that Indonesia pends on the understanding, meaning, and con- is actually a digital country. With more than 256 million people, 132 million of them are active text that surrounds it (Cassell & Symon, 2004). Internet users and 123 million of them access the In terms of data collection, the qualitative approach Internet through mobile devices (We Are Social, allows for a variety of different methods: interviews, 2017). What is more, the average user spends focus group discussions, workshops, ethnography, around 4 (four) hours on the Internet every day. observation, document analysis (Cassell & Symon, Thus, the actual number of fintech transactions in 2004). In this research, primary data were obtained Indonesia is considered to be much higher. from in-depth semi-structured interviews, while secondary data were extracted from literature re- Unfortunately, with regard to fintech role in fiview and document analysis. Secondary data are nancial inclusion, as expected by many parties, it intended to capture macro images, while inter- does not appear to have been fully carried out by views are intended to build a detailed and nuanced Indonesian fintech companies. Out of 142 fintech understanding. Indeed, this research follows the companies registered in the Indonesian Fintech general rules in rigorous qualitative research to Association, most of them are still operating in process the data that have been collected previous- Java and in big cities. In the context of geographily (Cresswell, 2003; Denzin & Lincoln, 1994). Each cal inclusiveness, it can be certain that those cominterview and discussion is transcribed carefully, panies are not yet focusing on such agenda (see supported by relevant photos and supporting doc- Figure 1). uments as well. Despite the limitations of various constraints, I have tried to use all available data and Indeed, inequality is a crucial issue in infrastrucintegrate them in such a way as to ensure a compre- ture development and population distribution in Indonesia. About 52 million users of digital hensive depth of analysis. infrastructure are those who live in the main isFurthermore, the next section will tell the find- land, Java. The remaining 18 million users live on the island of Sumatra. The users of digital infraings that I have obtained in the field.


Investment Management and Financial Innovations, Volume 15, Issue 4, 2018 Source: APJII (2015).

Figure 1. Digital infrastructure map of Indonesia structure on other islands range from 4 to 7 million people. It seems that they simply ignore those who are living on the other islands, not to mention those in the remote and outer areas. However, one of the respondents who became the manager of a fintech start-up argued: Our target market is still in Greater Jakarta area, but our custodians [are those] who do not have access to it [conventional banking]. Like advertising company, creative agency, media and creative industry ... Often also from traders (who work on online ecommerce trades)... Also sometimes from outsourcing services company, especially near Lebaran (Eidul Fitr) [CD].

Other respondents said: We have an office (headquarters). There are also several branches. We are also not fully operating online. Our program even requires direct assistance and [offline] mentoring program [AL]. Other respondents said: We [fintech] are different from start-up. I believe we are more mature [compared to start-ups]. We all understand the system, understand banking [ER].

This is in line with a number of government policies related to fintech. For example, Bank Indonesia has issued Bank Indonesia Regulation No. 16/8/PBI/2014 concerning Amendments to Bank Indonesia Regulation No. 11/12/PBI/2009 In this context, fintech may indeed be able to pro- concerning Electronic Money. In addition, the vide structural solutions for the growth of creative Financial Services Authority (OJK) also reindustries and electronic-based industries (e- leased Financial Services Authority Regulation commerce). Such efforts have the potential to en- No. 77/POJK.01/2016 concerning Information courage the birth of new entrepreneurs to be able Technology-Based Lending and Borrowing Services. to grow and reach a wider market distribution.

The next question that often arises is about security and trust. Can fintech be trusted? How well are they able to mitigate risk? One manager of a fintech company explained: We are members of the Indonesian Fintech Association. There is a regulation for that [fintech] ... Not anyone can just start a fintech company. All must follow the rules of the game, join regulatory sandbox ... It will be good for us, too, for customers too [XR].


Nevertheless, it seems that fraud and online moneylenders under the guise of fintech are also still free to operate. One of the users of the fintech service uses those kind of service by installing the application through Google Play store. He said: I honestly have debt in the [Fintech] apps, and finally ‘killed’ me by contacting all my contacts [that I have a loan and can’t pay it back in time] [WP].

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This opinion is supported by other respondents: In my experience… For example we have monthly installments [IDR] 1.5 million, now if we pay only 2 days late, we will have to pay the same next month plus fines. So you have to pay [IDR] 3 million and that doesn’t include the charges [PP].

This explanation is in line with previous observations and literature studies. Conventional banking for example, is directly dealing with fintech peer-to-peer (P2P) lending. However, despite offering similar products and services, fintech claim to only target markets that have not been served by unbanked population. On the other hand, the author found evidence that a number of conventional banks also invest in fintech, making them like standing on two legs2.

This explanation shows that the regulation of fintech cannot be said to be mature yet. Their overlapping roles could have the potential to lead to frauds such as shadow banking, pyramid schemes (ponzi schemes), and various other If we draw the line back to the theoretical disforms of abuse. cussion at the beginning, the increasing popularity of fintech is relevant to agency costs Meanwhile, one of the service users of fintech (Jensen & Meckling, 1976) and transaction costs expressed his opinion from a different side: I ac- (Coase, 1937) are getting cheaper. Fintech is a tually see that there is investment potential here. logical and pragmatic solution that offers simWe can consider to put our investment portfolio ple financial and banking products and services in fintech. The return is not bad, it can be 12-15% while expanding its scope. The emergence of [per year] ... it could be an alternative to money disruptive innovation (Christensen, 1997) did deposits and mutual funds. So far so good [NF]. begin to appear, but the symptoms of David defeating Goliath had not be seen. This description shows that a number of schemes offered by fintech can be an alternative invest- With regard to multi-sided platforms (Rochet ment instrument with more attractive lure of re- & Tirole, 2003), the majority of the fintech initurns. In addition, they also offer easy choices, tiatives being studied indicate the existence of especially for novice investors who want to try these practices. They operate in the middle of to invest in the real sector with a relatively large two different customer base through a techrisk. nology-based platform mechanism (Gawer & Cusumano, 2002). However, the multi-sidThen does fintech replace absolute banking and ed platform which is run is not that simple. financial services? Will the bank be displaced Regulatory factors also play an influential role by fintech? These questions were also asked to in the fintech industry3. a number of respondents. Some of them answered: Frankly, the idea of replacing conven- Despite using the latest technology and innovation, tional banks is indeed very tempting ... Hahaha the author have not been able to prove the existence ... Maybe [the bank] will not become extinct, but of positive network externalities (Katz & Shapiro, change roles [UB]. 1985) which appeared in the context of fintech in Indonesia. Respondents in this study, the majority of Conversely, other respondents argue: I don’t see young people, consider fintech as something stylish. that possibility ... Private banking and priority However, the influence of these perceptions on exterbanking ... I certainly prefer them rather than nalities has not been proven empirically. having to bother downloading, installing, and running applications. I’d better just call my per- Finally, allow me to conclude the results of this study. sonal banker directly [VB]. 2


For example, Bank Central Asia (BCA) invests through Central Capital Ventura (CCV) venture capital. Bank Mandiri also does the same through Mandiri Capital Indonesia (MCI). Bank Tabungan Pensiunan (BTPN) chose to develop its own service called Jenius, while Bank Negara Indonesia (BNI) and Bank Danamon chose to collaborate. In addition to Bank Indonesia and the Financial Services Authority, there are the Ministry of Finance, the Ministry of Communication and Information, the Ministry of Cooperatives and SMEs, as well as a number of other state institutions that have an interest in fintech in Indonesia.


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CONCLUSION My attempt to map fintech in Indonesia can be summarized as follows. First, fintech is the implementation and utilization of technology to increase banking and financial services. Fintech utilizes the latest software, Internet, communications and computing technologies such as predictive analysis, big data, artificial intelligence, and so on. This is also in line with previous research such as Hung and Luo (2016), Riemer et al. (2017), Zavolokina et al. (2016), among others. However, fintech seemed to be quite different from start-ups in other sectors. This complexity suggests that fintech is not just a phenomenon. Fintech is generally carried out by start-up companies, although this is not always the case. The fundamental difference is that the fintech company is not pioneered by students or fresh graduates as the start-up company, but initiated by those who have had previous experience. In addition, not infrequently large companies, including conventional banking and financial services, also invest in existing fintech businesses. Thus, while the technology provides the opportunity to disrupt the market, we have to question the potential for fintech to really fundamentally change the business and economic landscape (Riemer et al., 2017). The main sectors exposed to this risk at the moment are financing and funding. It might not be surprising if conventional banking will eventually only be a kind of ‘cashier’, while other products and services are offered by fintech due to their flexibility and efficiency in operational activities. Of course, this research was hindered by a number of limitations. In terms of methodology, for example, I shall acknowledge some limitations. First, the data sources obtained were very limited and the official sources released tend to lag behind. Second, the selection of interview samples is not too representative, especially those based outside Java. Finally, this research is only descriptive and exclusively looking at the fintech phenomenon simply by ignoring external variables. Nevertheless, there are a number of opportunities for further research. For example, the specific sector of fintech needs to get a more significant and comprehensive portion, such as equity crowdfunding or peer-to-peer lending. Because this study focuses only on fintech, the interaction or connection with other neglected external variables can also be further investigated. Finally, different methods and approaches are needed to confirm or refute findings in this study.


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